hobby income, use gross revenue or gross income?

Gross income from hobby is reported on line 21 (other income). Deductions are taken on Schedule A.but (generally) only to the extent of the gross income from that hobby. The deduction is also reduced by

The NATP presenter is correct. Your gross income (GI) from a not-for-profit activity is computed in the same manner you would compute it for a profit activity. You take your gross receipts and subtract your cost of goods sold to arrive at GI for Line 21. If you had returns and allowances you could also subtract that to compute GI.

Correct. The cost of goods is an element in determing gross income.

The INDIRECT expenses (on a Schedule C, lines 8+) are NOT part of gross income. They are an adjustment to gross income to arrive at AGI.

- Authority: IRC Section 62(a)(1).

Therefore, if the activity fails to qualify as a business (e.g. "hobby"),

This is why drug dealers (whose expenses are denied under IRC 162(f)) still get their cost of goods for their tax computation.

Gross income = Gross receipts - cost of goods - returns/allowances. Gross income is always AFTER INVENTORY COSTS.

IRC 162 (f) reads:

I don't see how that denies other deductions (e.g., costs of supplies such as glassine bags).

Wrong code section. It's Sec. 280E:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Does that mean medical marijuana dispenseries will have to be nonprofits to avoid tax problems?

Just curious. How does the quoted section allow deduction of cost of goods sold?

I may have miscited the subsection. However, it might be case law under this or subsection (c). Either way, violations of law are not considered "ordinary and necessary" as stated in subsection (a).

I'm guessing here (we need a lawyer). Marijuana is still classified as a Schedule I drug. However, one may conclude that Schedule I marijuana is non-prescribed marijuana as Schedule I drugs and substances require: There is no currently accepted medical use in treatment in the U.S. and there is a lack of accepted safety for use of the substance under medical supervision. It seems to me that prescribed medical marijuana would be excepted from Schedule I.

Therefore I conclude you start with gross income and take your business deductions unless Part IX (this includes Sec. 280E) says otherwise.

I did a little research on CA law, as that state has the largest number of dispensaries, CO, my closest neighbor that has legalized it and my home state of NM. CA law is quite clear that dispensaries must be non-profit organizations. It also appears that you can't sell for cash. (That's not to say that every dispensary is following the law.) I could not find anything in CO law that requires the licensed establishment to be nonprofit nor could I find anything in NM law that requires the licensed producer to be nonprofit.

I'm not sure what all this means for tax purposes.

According to medicalmarijuana.procon.org there are now 14 states + D.C. that have legalized MM and two states that have laws that look favorably at MM (AZ allows a Dr. to prescribe and MD allows a defendant to use MM as a defense.

If anyone wants to look up the laws for each state, here is the link:

I forgot about that section.

However, let me answer your question with this one.

Inventories, for computation of income, come in via the "Accounting Methods" part (Subtitle A, Part II, Subpart D = Sections 471-474).

Note also that the denial is for trafficking, not for manufacture. ;-)

What's really annoying, is that if your hobby involves shipping your inventory to people who pay for that, you must include the shipping income in gross income on line 21, but you can only deduct the shipping expenses on Sched A subject to 2%-of-AGI limitation (because it is not part of COGS)....even if you simply pass along the shipping expenses with no mark-up. Shipping can easily exceed the sale price of many items produced as a result of hobby activities.

Agree. Just as gross income from sale of capital assets is not the gross proceeds, but the gain on the sale (loss on sale equals zero gross income).

-Mark Bole

Lest we forget, Step One in the audit of a drug dealer is to disallow every expense on the return unless it is supported by meticulous documentation.

Upon determining the DD's gross revenue,it would be appropriately malacious to make the GR available to the State Sales Tax Auditors!

Dick

Here in CO dispensaries are having a hard time getting banks to allow them to open accounts, because the banks consider the activity illegal, and they want no part of it. That makes it difficult to conduct the business on other than with cash sales!

We're getting off topic.... however, the article below is specifically about trying to make money selling legalized marijuana in Colorado.

There is a way around that, if the buyer is willing: the buyer can open an account with UPS or FedEx, and that gets used to ship stuff to him. The seller never sees money, hence no income. (I don't know if that would also work if the buyer sent the seller a check payable to the shipping company; there's no constructive receipt because the seller can't cash or depost it.)

Seth

There is no such thing as legalized MJ. Feds have well and truly pre-empted deciding what is and is not a legal pharmaceutical.

If there are any voracious, small-minded provisions in the Internal Revenue Code, Congress put them there, not the IRS.